It is now over 10 years since Satoshi Nakomoto wrote his transformative white paper on bitcoin, the crypto-currency from which blockchain technology emerged. Over a decade on, blockchain has become synonymous with technology innovation.
In 2018, management consultancy Deloitte revealed 43 per cent of business leaders place blockchain as one of their top five strategic priorities and a critically relevant technology. Furthermore, Gartner listed blockchain as one of the top ten strategic technologies for 2020, expecting the technology to overcome scalability and interoperability issues by 2023.
Moving into 2020, blockchain has become much more than just a concept or innovative idea when it comes to the contract. In the last few years, enterprise commerce has been transformed by the digitisation of contracts, unleashing enormous value by allowing cloud computing (and later AI) to turn static documents into strategic business assets.
Blockchain represents the next step in the evolution of how we manage and interact with contracts. It’s ability to record transactions based on key pieces of metadata such as rules, entitlements, clauses and obligations makes it ideal for automating, controlling and managing the (majority of) business processes routed in contracts, in turn triggering actions based on pre-programmed activity and improving visibility across the extended enterprise.
Here are five ways blockchain is already revolutionising the contract:
#1: Driving efficiency around the transfer of goods in the supply chain
As modern supply chains become more complex, ensuring contractual commitments are met and delivered on time has become increasingly important. For example, in the manufacturing or aviation space where smaller parts are often made by multiple suppliers in a just-in-time model; ensuring everything that is required to assemble a final product arrives on-time is a challenge. Hosting contracts on the blockchain has huge potential to streamline business to business interactions and disrupt processes such as invoicing, reconciliation, settlement and accounting. Compliance needs, supply disruptions or changing specifications impacting contractual obligations can rapidly and securely ripple through a blockchain, with the potential of saving millions, improving quality and maintaining compliance.
The blockchain can thus act as a secure and trusted change management agent in complex supply chains linked by contracts.
#2: Delivering secure digital transactions
Data privacy and security concerns are making transactions expensive and complex. At a time when breaches and security concerns are on the rise, blockchain technologies have the potential to drastically reduce the cost of transactions by enabling faster business in a federated model, making transactions simpler and affordable while removing intermediaries.
While no technology can fully prevent fraud or data misuse, blockchain comes close with its ability to verify and approve transactions among participants in a blockchain network. Verification and approvals can be encoded in the terms of the contract – payment terms, discounts, SLAs, third party data like foreign exchange rates, etc. By connecting manufacturers to their suppliers and customers, the full journey of a contract and the events surrounding it can be tracked, ensuring compliance all the way back to raw materials. Every transaction on a ledger becomes an immutable record of what happened (and what didn’t).
The blockchain thus provides the framework for contractually verified digital transactions, revolutionising the way transactions are verified and fulfilled today.
#3: Providing brand protection
In complex supply chains, a key challenge from a management perspective is contract enforcement can go beyond the control of the final buyer, who can suffer by association. For example, a company that manufactures computers might buy a graphics card from one supplier, who in turn purchases smaller components from a third-tier supplier who does not comply with legal and regulatory terms. As a result, non-compliance can result in the manufacturer’s customer or supplier relationships being damaged, or exposing the organisation to breach of contract, resulting in fines, penalties or criminal charges.
In such a scenario, a technology like blockchain can enable manufacturers to identify a regulatory breach further down the supply chain thereby helping to reduce risk.
Global automotive manufacturer Mercedes-Benz has looked to mitigate this exact risk by introducing a blockchain platform to ensure compliance throughout its supply chain. Mercedes requires all suppliers (direct and indirect) to meet vigorous control standards and obligations around working conditions, human rights, environmental protection, safety and ethics. By hosting all contracts on the blockchain in a way that protects identity and commercial information but still maintains the contractual agreement for ethical or sustainable sourcing, each new and existing supplier guarantees compliance with Mercedes requirements by submitting their documentation through the blockchain.
The blockchain thus has the potential to encourage a supply chain that is transparent yet protective of competitive information, mitigating risks for both supplier and manufacturer, revolutionising the way supply chains are managed today.
#4: Enabling complex pricing models that may have been traditionally difficult to implement
The traditional pricing model, based on the premise that customers pay for what they get, has many competitive advantages but in industries and environments where the outcome is more complex it can be difficult to implement.
For example, taking an outcome-based approach in the pharmaceutical industry creates challenges around agreement. A cancer drug that is subsidised by a country’s government could have very attractive pricing implications if the subsidy is paid to the manufacturer only if the drug is effective in treatment. The efficacy proof is in the health record of the patient and is managed by the health care provider, not the government or the drug manufacturer.
Blockchain technology provides an ideal solution to ensuring that transactions can be triggered based on fulfilment of a contractual obligation, verified independently by third parties on the blockchain.
This promise of blockchain’s ability to verify an external outcome against its contractual element to trigger an action or transaction will revolutionise how contracts play a role in modern business processes.
#5: Making autonomous contracts a reality
Contracts contain the rules of business – the outcome of a sale, the payment to a supplier for services rendered or goods provided. Contracts also contain historical data – what is the risk appetite of a business or geography, what rules are important and why, and what affects the profitability of a business or its compliance to regulations? With Artificial Intelligence and Machine Learning able to make more sense of the written word, digitised contracts are giving up their secrets, enabling a contract to make its own decisions in changing business environments based on historical and real time data. For example, a contract could autonomously negotiate with a supplier to provide a discount because the input costs of a specific raw material fell steeply in a region. Or a rental car contract could autonomously enhance insurance as driving conditions change to hazards due to a weather event.
Autonomous contracts can only become reality if they are supported by the blockchain – enabling decisions by allowing verified, trusted and unbiased data sources to enable automatic transactions. This is possibly the holy grail of the enterprise – self-negotiating and self-executing contracts that everybody can trust.
Contract Lifecycle management has become a core part of the enterprise toolkit, and it is set to be transformed by blockchain. Contracts present a clear opportunity for the distributed ledger technology to do more than simply manage a process; a view shared by Gartner, that argues smart contracts are set to act as “catalysts for the introduction of new business models.” Gartner’s report on the four phases of the blockchain spectrum predicts that we’re currently in the midst of phase two in the development of the technology – where innovative solutions will continue to emerge and transform existing processes. The application of blockchain in CLM is a prime example of an innovative solution, and its revolution of contracts as the foundation of commerce is set to bring about real-world benefits across enterprises.
Monish Darda, CTO and co-founder, Icertis